In today’s fast-evolving digital landscape, cryptocurrency adoption is gaining momentum among businesses. By late 2022, roughly 2,352 US companies accepted Bitcoin, and this number continues to grow. Embracing digital currencies offers a myriad of benefits, from gaining a competitive edge to accessing new markets.
But what exactly is crypto in business, and how can it benefit your company? This comprehensive guide delves into the fundamentals of cryptocurrency and explores its transformative potential for businesses.
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What is Crypto in Business?
Cryptocurrency in business refers to the use of digital or virtual currencies that rely on cryptography for security. These currencies operate on blockchain technology, which is a decentralized ledger that records all transactions across a network of computers.
Why More Businesses Should Consider Using Cryptocurrency
Wallets and Tracking
Cryptocurrency is managed and stored in digital wallets, and establishing an effective wallet structure is essential for a successful crypto treasury function. Many organizations adopt a multitiered approach, utilizing “hot wallets” for operational accounts while reserving “cold wallets” for long-term holdings that don’t require frequent access.
For entities handling high transaction volumes, tracking these transactions can pose significant challenges. Effective tracking involves maintaining detailed records that include the date and time of acquisition, the value at the time of purchase, and the basis assignment. To mitigate the uncertainty associated with price volatility of traditional crypto assets, many organizations choose to convert their holdings to stablecoins.
For instance, this conversion might involve exchanging Bitcoin for stablecoins such as USD Coin (USDC), Gemini Dollar (GUSD), or Paxos Standard Coin (PAX). Once the conversion is complete, the crypto becomes more easily usable for traditional banking and treasury operations. This includes making disbursements or executing on-demand payments, all while benefiting from real-time transparency for relevant parties and avoiding the delays and costs associated with conventional wire transfers.
An Additional Perspective from Treasury
While cold wallets are essential for long-term storage, hot wallets play a crucial role for several reasons. They not only support immediate operational needs but also assist in forecasting the various purposes for which cryptocurrency will be utilized or stored. Specifically, hot wallets facilitate:
- Rapid Payments: They enable swift transactions, allowing for immediate disbursements when needed.
- Crypto Fund Transfers: Hot wallets simplify the transfer of funds in cryptocurrency, enhancing liquidity and flexibility.
- Short-Term Savings and Investments: They provide options for short-term savings and investments, yielding benefits similar to those found in money markets.
Most importantly for the Treasury function, hot wallets offer the necessary clarity and visibility to help Treasury teams continuously assess and adjust crypto allocations. This ongoing insight ensures that the organization can respond effectively to changing financial needs and market conditions.
Anti-Money Laundering (AML) and Know Your Customer (KYC)
AML and KYC regulations have significant implications for users within a cryptocurrency network, particularly when accepting large payments from foreign clients. Companies must be vigilant about their obligations to avoid inadvertently facilitating money laundering through foreign vendors or suppliers in complex international supply chains.
Moreover, all businesses must adhere to the rules and regulations set forth by the Office of Foreign Assets Control (OFAC). This means companies must ensure they can ascertain—or enlist a trusted third party to verify—the source of any cryptocurrency they accept or disburse. It is essential to remain vigilant regarding sanctioned and restricted Bitcoin and other cryptocurrency addresses to mitigate potential legal and financial risks.
Second-Layer Protocol Risks
One area of innovation that companies should closely monitor is second-layer protocols. These are scaling applications built on top of blockchain systems, designed to enhance the speed and reduce the cost of crypto transactions. As these second-layer protocols mature, they are poised to compete with traditional payment systems, potentially offering a more effective and desirable alternative to the existing methods.
For example, second-layer platforms often underpin systems that enable users to purchase small enhancements or upgrades in games or applications. However, when implemented in a corporate environment, these protocols carry certain risks. Unlike traditional transactions that are immediately recorded on the blockchain, second-layer protocols aggregate a series of smaller transactions before they are settled on-chain. This process introduces a window of vulnerability between the execution of a transaction and its recording on the blockchain. During this transition, there is potential for errors or manipulation by a malicious actor if they gain access to the network.
Despite these risks, the advantages of using second-layer protocols are compelling. For smaller payments—ranging from a cup of coffee to a weekly salary—the direct settlement fees on a blockchain can often exceed the value of the transaction itself. In contrast, second-layer protocols typically offer significantly lower transaction fees and faster settlement times. As innovation continues in scaling solutions and the economics of transaction fees, we expect to see heightened competition between these second-layer protocols and traditional payment systems.
Tax and Accounting Considerations
The tax and accounting treatments for enterprises utilizing digital assets are influenced by several factors.
- Accounting Challenges: When using cryptocurrency as a medium of exchange, similar to fiat currencies, specific accounting challenges arise. Cryptocurrencies are generally classified as intangible assets, which may necessitate adjustments or additional disclosures in profit and loss (P&L) statements and cash flow statements, among other financial documents.
- Tax Treatment: For tax purposes, receiving or making payments in cryptocurrency may be classified as a barter transaction. This involves a non-monetary exchange of goods, services, or non-financial assets between two parties, which can complicate tax reporting.
- Price Volatility Impact: The inherent volatility in cryptocurrency prices throughout the transaction lifecycle significantly affects the valuation of digital assets. This volatility is a critical consideration for both accounting and tax purposes, influencing how companies report and recognize their digital asset holdings.
Payroll Considerations for Using Cryptocurrency
When implementing cryptocurrency for payroll purposes, companies must carefully consider several factors:
- Tax Withholding Tracking: Robust processes must be established to accurately track withholding taxes for W-2 forms. This ensures compliance with tax obligations and proper reporting.
- Fiat Currency Remittance: Most tax authorities do not accept cryptocurrency as a form of payment. Consequently, companies must remit withholding taxes in fiat currency, which may require additional transactions to convert crypto into fiat before payment.
- Transaction Recordkeeping: Since cryptocurrency does not generate conventional bank statements, companies need to implement measures to capture and disclose all relevant transaction-level details. This information must be provided to the IRS, state, or foreign tax authorities to ensure accurate reporting and compliance.
- Public Company Considerations: Publicly traded companies face additional regulatory requirements when compensating officers with cryptocurrency, such as disclosing these payments in proxy statements, which necessitates thorough documentation and compliance with securities regulations.
Accounting for Crypto Payments
The accounting for digital assets received as payment for goods or services is governed by revenue recognition rules, similar to regular business transactions.
- Non-Cash Consideration Valuation: When a company agrees to accept a non-cash form of consideration from a customer, such as cryptocurrency, the value of that consideration is determined at the inception of the contract.
- Revenue Recognition: The price of the goods or services that drives the recorded revenue is based on the value of the cryptocurrency at the time the agreement is made. Any subsequent fluctuations in the value of the cryptocurrency do not affect the revenue recognized by the company. This holds true regardless of when the underlying goods or services are delivered to the customer, as outlined in the terms of the contract or the receipt of the cryptocurrency.
- Separate Accounting for Value Changes: Although changes in the value of the cryptocurrency asset do not impact revenue recognition, they may still necessitate separate accounting treatment. For instance, such changes might be classified as an embedded derivative, which would be accounted for outside the revenue recognition framework.
Example Scenario
Consider a sports fan who purchases a full-season suite for one bitcoin today. The team would need to consider the following:
- Revenue Value Determination: What value of bitcoin will be used to recognize the revenue?
- Price Volatility Management: How will the volatility of bitcoin’s price be accounted for in the financial statements?
- Financial Statement Presentation: How should this transaction be presented on the financial statements, and what disclosures are required or necessary for clarity?
Concluding Thoughts
So now you’ve learned about What is crypto in business? KwickBit hopes this article will provide you with more useful information.
Adopting cryptocurrency is more than just implementing a new payment method—it requires strategic overhaul and strong leadership. Start incrementally and ensure thorough preparation and engagement from all stakeholders.
With the potential benefits of crypto, businesses should explore its relevance and application to their operations.
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